Capital outflows set to continue amid imbroglio

More foreign capital will flow out of Thailand as continued protests exacerbate a situation already under pressure from the United States' tapering of its quantitative-easing policy.

"Fundamentally, the Thai economy looks less attractive than that of its neighbours, and as foreign investors are selling [in] emerging markets, the baht will remain weak this year," said Danny Suwanapruti, a Singapore-based fixed-income strategist for Standard Chartered Bank.

"On top of that, politics is exacerbating the problem, when investors are looking for markets which are very cheap and offer very good prospects."

While exporters cheer on the weakening baht, consumers will see their fuel and power bills go up. And they will have to accept that the baht will not quickly recover from its speedy fall against the US dollar, analysts say.

The baht declined by 0.1 per cent to 33.06 per dollar last week, after hitting 33.148 on January 6, the weakest level since 2010.

The currency has been weakening since the middle of last year, as foreign investors sold shares and bonds. They expect higher returns in the United States because of the Federal Reserve’s tapering of its bond-buying programme.

The prospects for the Thai economy look uncertain, as public investment, particularly transport-infrastructure projects under the Bt2-trillion scheme, could be delayed. Recently, several economists have voiced concerns over prolonged political conflicts, which could hurt consumer confidence and dent domestic consumption.

Bank of Thailand spokeswoman Roong Malikamas revealed last week that at its meeting scheduled for January 22, the central bank’s Monetary Policy Committee could consider cutting the growth forecast for 2014, from 4.8 per cent.

Asia Plus Securities has already done so. Last week, it revised its growth forecast from 4.3 per cent to 3.3 per cent, mainly on an expected drop in domestic consumption and the services sector. Both could suffer as the number of tourist arrivals drops.

The house also warned that if a solution to the political impasse remains elusive for another month or two, the growth forecast for gross domestic product could be cut further, to below 3 per cent.

Last month, tourist arrivals rose by only 6.1 per cent year on year, compared with the 11.93-per-cent growth rate in November. As such impacts are likely to continue through the first six months of the year, Asia Plus lowered its forecast for the services sector’s growth from 20.5 per cent to 12.2 per cent.

Baht ‘vulnerable’

It remains uncertain how much the export sector, which contributes some 70 per cent of GDP, will benefit from the hoped-for global economic recovery this year.

All things considered, it seems unlikely that the baht will pick up soon amid the poor economic and political outlook.

HSBC said in a report on the Asian foreign-exchange scenario titled "2014 Outlook: Survival of the Fittest" that the baht would be more vulnerable to further outflows because of a rapid build-up of external debt and a weakening current-account position.

"Political tensions will add to the downward pressure on the Thai baht," it said.

In contrast, the house favours the Indian rupee, the Indonesian rupiah, the Singapore dollar, the Philippine peso and the Malaysian ringgit. "The Singapore dollar should outperform Asean currencies given the tightening stance as well as Singapore’s stronger balance-of-payments profile," it said.

"The ringgit faces headwinds from various fronts: a thinning current-account surplus, high foreign exposure in the local debt market, the threat of higher inflation and an elevated fiscal burden."

As Malaysia’s central bank remains one of the least interventionist in Asia, HSBC expects the ringgit to remain "volatile with a depreciation bias".

Bloomberg reported last week that Australia and New Zealand Banking Group, which had the most accurate estimates for the last four quarters as measured by Bloomberg rankings, said its current prediction of a 3.1-per-cent rebound of the baht this quarter to 31.80 per dollar did not reflect the unrest threatening next month’ s elections.

Citigroup, ranked third, said it was reviewing its end-March forecast of a rise to 32.

"The political situation is something that is weighing on the baht significantly in the near term," Khoon Goh, a Singapore-based strategist at ANZ, told Bloomberg. "If we don’t get a resolution from the election, then the risk is the baht will continue to weaken further, in which case we will be forced to revise our forecast."

Suwanapruti at Standard Chartered said it would take a long time before foreigners returned to the Thai bond market, given valuation losses, low interest rates and the current-account deficit. He believes the most attractive emerging bond market is Indonesia, particularly if pro-trade Rhoma Irama wins the presidential election this year.

"In Thailand, the political risks are now on top of all uncertainties. This adds into the uncertainty element, which in turn hurts the sentiment on the baht," he noted.